Charity's hot path

Big givers increasingly are using donor-advised funds to channel their philanthropic efforts

Chicago advertising veterans Ray and Susan Gillette donated to StreetWise through a donor-advised fund managed by the Chicago Community Trust. Behind them is StreetWise vendor Russell Adams.

When retired advertising executives Ray and Susan Gillette decided to support social service charities in Chicago, they had a choice of starting their own family foundation or creating a donor-advised fund.

They chose a donor-advised fund through the Chicago Community Trust “because they have access to information about nonprofits, they manage the fund and we still make the decisions on where to donate,” Mr. Gillette says. One of the couple's favorite charities is StreetWise, an organization that works with the homeless.

Donor-advised funds are individual accounts held under the umbrella of larger nonprofit community organizations, such as the trust and the Jewish United Fund, or in financial institutions.

The number of such funds has grown quickly in the past few years, in part because they are easy to set up but also because donors can take a deduction when they put money into the funds rather than wait for the grants to be made. While nonprofits welcome the grants, some nonprofits have questions about their lack of transparency compared with other forms of philanthropy.

Fidelity Charitable Gift Fund, Schwab Charitable Fund and Vanguard Charitable Endowment Program are the nation's largest holders of donor-advised funds. They administer a total of 90,000 funds with $22 billion in assets, an increase of more than 60 percent from two years ago.

The Chicago Community Trust and the Jewish United Fund are the two largest community organizations in Chicago administering donor-advised funds. They hold a combined 1,890 funds with assets totaling $717 million. That's up from 1,533 funds and $363.2 million five years ago.

The funds are similar to a family foundation but without the administrative upkeep. In Illinois, a family foundation, for example, is a stand-alone entity that must have three directors and file public documents with the state and federal governments to get nonprofit status. It may employ family members to oversee it. And it must donate 5 percent a year to charity.

A donor-advised fund is administered under a bigger financial organization or community foundation. It doesn't have the same rules of governance because it falls under that larger nonprofit, which already follows those rules. There is no minimum payout requirement (again, because they are part of larger charities that meet the rule). And there's an option to give anonymously through the umbrella group.

Givers can open a donor- advised fund for as little as $5,000 at some organizations.

“A lot of people pursue it because of the simplicity,” says Jim Duggan, a managing partner of Chicago law firm Duggan Bertsch LLC. “They're looking for very basic management of wealth and charitable distribution or they're looking for a higher deduction threshold.”

A donor to a family foundation can deduct the contribution amount up to 30 percent of his or her adjusted gross income, whereas a donor-advised fund can provide a charitable deduction of up to 50 percent, Mr. Duggan says.

FEES

The Chicago Community Trust assesses an annual administrative fee of 0.60 percent, plus a pass-through investment management fee of 0.80 percent. Funds of more than $1 million can select their own investment manager, in which case the trust waives its management fee.

Financial institutions have similar fees. At Vanguard, donors are charged 0.60 percent for the first $500,000 and 0.40 percent for the second $500,000.

Costs for a family foundation, by comparison, can vary widely.

“Everything depends on the complexity of the giving,” Mr. Duggan says. But generally, “it costs less to establish a donor-advised fund than a family foundation.”

Marshall Field V, the great-great-grandson of Chicago department store founder Marshall Field, dissolved his family foundation a few years ago and converted it into a donor-advised endowment to benefit the Chicago Community Trust. (Unlike with a donor-advised fund, the principal of a donor-advised endowment cannot be given away.) He liked the idea of the research that the trust put into Chicago-area nonprofits.

Mr. Field's fund is set up so that he and his wife, Jamee, their children and grandchildren can give away the income of the fund. “It ensures that the money will stay in Chicago to do good in Chicago even if families move away,” says Mr. Field, who spends most of his time in Florida. “It's great for donors and it's great for the trust. The donor gets credit for the donation and it lasts for three generations.”

Recipients of the grants are grateful regardless of how a fund is structured.

“You open an envelope like that and everyone goes over the moon. It came at the right time for us,” says Michael Weber, managing artistic director of Porchlight Music Theatre in Chicago. A donor-advised fund established by Hope Abelson, a longtime Chicago theater patron, gave Porchlight $20,000 right before the recession. She died in 2006, but her fund has continued doling out grants to Porchlight and other theater companies in the name of her daughter, Katherine Abelson.

A donor-advised fund established by theater patron Hope Abelson gave Porchlight Music Theatre $20,000 right before the recession. "It came at the right time for us," says Michael Weber, managing artistic director. "You open an envelope like that and everyone goes over the moon." Photo: John R. Boehm

As popular as donor-advised funds are with charitable givers and their grantees, though, there's some concern within the nonprofit community that such funds lack transparency and that worthy nonprofits are being overlooked.

Unlike family foundations, which can be easily researched online, the people behind donor-advised funds can remain anonymous. Under the Chicago Community Trust, for example, there are donor-advised funds named “Polka Dot Fund” and the “Thanks be to God Fund.”

While community foundations list donor-advised funds in their annual reports, financial institutions don't, making it difficult for nonprofits to get on the radar of potential donors.

“That's a real frustration,” says Valerie Lies, president and CEO of Chicago-based Donors Forum, an association of Illinois funders, nonprofits and advisers. Many “nonprofits have very little, if any, access to those dollars.”

Terry Mazany, president and CEO of the Chicago Community Trust, defends donors who want to keep out of the limelight. “Consider a donor who wants to contribute to a food pantry but doesn't want 400 food pantries in the area knocking on their door,” he says. “Or there's the donor who might like one particular cause, but it's a political hot button, like Planned Parenthood, for example.”

Susana Vasquez, executive director of Local Initiatives Support Corp. Chicago, a neighborhood improvement group, has been a recipient of donor- advised funds, but she worries that such donors aren't getting a full picture of the nonprofit landscape.

“I absolutely respect any donor's desire to remain anonymous. But given there's a tax benefit for making the donation, a certain amount of openness would be helpful to grant-seekers and donors,” she says. “When you have a more open environment, (donors are) more able to have more information to make decisions.”

Financial institutions, which hold the bulk of donor-advised funds in the country, say it's not their job to inform donors about nonprofits. That decision-making is up to the donor, they say.

“Community foundations do more on-the-ground research on needs of a specific community, and that can be helpful to donors who want that kind of research,” says Kim Laughton, president of San Francisco-based Schwab Charitable, which last year reported $742 million in donations, up 36 percent from 2012. “We don't do that. We link to what we think are good resources and databases.”

“We want to be in a relationship with you about charitable giving. That's our business. You can get done what you want to get done (in a financial institution), but we don't think it will be as rich of an experience.”